Pushing the VC ecosystem forward one conversation at a time

Written by Silvio Memme, OMERS Ventures

First I want to say a big thank you to those who reached out, having read my earlier post about breaking in to VC. It clearly struck a chord with lots of you, which is always a pleasant surprise…and it is heartening to see how many truly talented people are out there and interested in getting into VC. I promise to continue flying the flag for non-traditional routes into VC if you all promise to keep sending me your hot deal leads :)

In the spirit of sharing insights and observations as I continue this journey as an investor, there’s something I think Canadian (in fact all non-tier 1) VCs think about a lot and need to talk about more. It’s the elephant in the room. And as the influx of capital aimed at early-stage business in Canada explodes (both from non-Canadian VCs and from crossover funds investing in earlier stage businesses), this issue is only going to get tougher.

How do non-tier 1 US VCs compete against the perceived (and I would suggest well-earned) badge of honour that a startup experiences when they have a US tier 1 VC vying for space on their cap table? I think the answer to this might be simple. They don’t.

Hear me out (and please tell me if you think I’m wrong!).

There is no doubt that being able to say you’ve raised money from Andreessen, Sequoia, Tiger, Union Square Ventures or Accel creates an immediate legitimacy for future investors looking at deals. And for good reason. The reputations of these and other tier 1 investors have been built over decades, in the most competitive venture market in the world, and are a result of investing in companies that go on to achieve extremely profitable, and very high-profile multi-billion dollar exits. And let’s remember the feedback loop in VC is notoriously long!

I’m not sure whether founders here realize it or not, but Canadian VCs think a lot about how to ‘compete’ with the big guns coming into Canada and investing in ‘our’ startups. And no doubt the same thing is happening at boardroom tables in Europe where US investors are also making a notable impact. In fact, if you read the opinion piece by Simon Mallaby about venture capital’s ‘new race for Europe’ in the FT recently you could be forgiven for thinking that venture capital didn’t exist in Europe until Sequoia set up shop (spoiler alert — it did).

I wonder if we are asking the wrong question. We exist in a market flush with capital and by its nature, there can only ever be so many tier 1 investors. And if I were a founder, of course I’d want those names on my cap table too. But the broader question is: in addition to that badge of honour what are the other categories of investor that can build the cap table puzzle in the most effective way for founders and their companies? And how can founders take advantage of the shifting landscape in VC to use it to their strength?

In the few years I’ve been in VC, there have certainly been times when we’ve lost deals we wanted to win — and usually it’s been to bigger, more recognizable names. As a proud Canadian, there’s a part of me that is ecstatic to see this. A recent NYT article discussing the Canadian tech scene is just another reminder that we are playing in the big leagues. This flood of capital, in particular smart capital, is great for the tech ecosystem, great for the economy, great for founders. And it doesn’t seem like things will be changing any time soon.

After a flurry of recent deal announcements led by tier 1s in Canadian companies, I jumped on a call with a partner at one of them to discuss how they were thinking about the Canadian market. He mentioned that they love the Canadian market and would happily do a deal a month here. There has been plenty written about this influx of US capital into the Canadian market here and here. The stats speak for themselves: a quick Pitchbook pull shows that investment velocity and size in the Canadian market from the who’s-who of tier 1 VCs is exploding: 23 deals in Q4’21/Q1’22, $2.2B invested. And equally the amount invested is growing exponentially: $1.43B in Q1’22 [8 deals], $1.95B in 2021 [25 deals], $100M in 2020 [5 deals].

A moment for reflection

I am a true believer competition drives innovation, but I am also the first to admit that I have lost sleep thinking about what we could have done differently on those deals we lost to tier 1 VCs. Maybe we all need to be thinking about the options available for founders as the VC ecosystem evolves and recognizing more openly the different roles that different types of investors play.

But early-stage investors also need to have the confidence to know that as we continue to make standout investments, as founders talk about the value we are able to bring, and as all of our funds mature to include more exits — there is no reason we shouldn’t be vying for a spot in that tier 1 space. In talking to several founders about this — and doing a bit of analysis of our own deal flow, I’ve broken the ‘winning investor’ bucket into a few categories:

Famous investors: “I don’t care what you bring to the table, but if you have an office on Sand Hill Road, we’re good to go!”. The reality is that in addition to the fancy addresses, these folks do bring a lot to the table. Speaking with Canadian founders who have worked with these funds, it is clear that the connections, data and operational expertise that many of these tier 1 firms provide is unrivalled. But it doesn’t need to be the full picture.

Every time I think about this challenge, I am reminded that I dreamed of working at Ferrari as a child, not FIAT. But having had stints at both, I arguably got a lot more out of my FIAT experience than my Ferrari one. But having Ferrari on my CV gets me noticed. Part of building a reputation as a great investor is proving the value we can add, time and again, if that’s what founders want from us.

Operational expertise right in your sweet spot: as more and more VCs hire investing talent from outside the finance world, founders increasingly have access to real superstars who have ‘been there, done that’. If I use our own team as an example, Zhong Xu, co-founder at Deliverect, was vocal about the fact that Jambu Palaniappan’s experience at UberEats was a big part of what attracted him to OV. There are VC firms who have built their entire offering around being built ‘by founders, for founders’ and there’s something comforting about knowing that the person who joins your board has also walked in your shoes.

On a slightly different, but related note, I don’t think we are alone at OV in that one of the ways we measure ourselves is whether we are a founder’s ‘first call’ — in good times, but more importantly, in bad. It is the latter that really signals we are seen as a true partner.

A purpose-driven fund with shared values: this is an interesting one, and something that has come under the spotlight recently. For some founders, where their money comes from (and where it goes if they have a successful exit) is a big deal. They also want to know an investor understands their mission and resonates with the idea that founders don’t need to sacrifice the pinnacle of success (and profit) for a deeply meaningful mission.

When I say shared values and mission, this doesn’t only mean making sure your investor’s LPs aren’t tobacco companies or oligarchs, or that the fund is focused on ending world hunger. It can be as simple as alignment in strategic vision or focus. Take Human Capital for example: “A venture firm for engineers. We believe great engineers build great companies. We invest in founders and startups that share that mindset”. As an engineer, you’ve obviously gotten my attention (even before I look at their impressive portfolio).

We are lucky enough to see the benefits of this ourselves. Time and again we hear from founders that the fact that our fund doesn’t simply ‘make rich people richer’ is one of the reasons they are drawn to us.

Thematic investors: for many businesses, especially at the early stages, it makes good sense to bring in investors who are deep specialists in their field. And by this, I mean that they have spent decades working in the same field as you — they know the players, the market dynamics and have a strong opinion on future challenges and opportunities. A great example of this is one of our recent investments, 99 counties. Investing in this business was an unusual one for us (you can read all about it here) but founder Christian Ebersol was intentional about bringing on investors that would really add value to him at the earliest stages, including Supply Change Capital — a VC with deep expertise in the food and technology supply chain.

So… founders spend a lot of time looking at the logos an investor brings to the party… but I think there’s an opportunity to turn the tables. For founders to think long and hard about the logo mix that they want to make up their cap table. Perhaps more importantly, being extremely intentional about the people behind those logos that will be sitting around their boardroom table (see a great post by three of our partners talking about board composition).

Of course, it may not last forever, but with so much capital out there, founders can be intentional about the investors they are most proud to bring on board. Maybe it is time for non-tier 1 VCs to stop asking themselves ‘what can we do to compete?’ and start asking how we can be a force multiplier on a cap table full of amazing investors to best serve founders and their companies?

What role can we, as investors play?

So, the most important part of this post is to ask a question: founders, what do you really care about when it comes to your investors? And to Canadian founders, how can we, as a community of homegrown Canadian VCs, help you more?

I am based in Toronto. An incredibly dynamic and vibrant startup ecosystem for sure. But part of the challenge of being in a market that is orders of magnitude smaller than the US is that the VC ecosystem initially was predominantly made up of generalists (though arguably this is changing). Generalist funds, by their nature, will undoubtedly take longer to get to the same stage of market knowledge as a deep thematic investor or one with armies of analysts. When up against big tier 1 names, that dynamic adds yet another layer of complexity.

But I think as investors, it is up to us to convince founders of the benefits of working with non tier-1 VCs. And those benefits need to be tangible and real! Founders should get this insight not by talking to us — but by talking to other founders. Any VC’s track record within the ecosystem precedes them, and I know that’s what drives us at OV to work as hard as possible every day to make sure we are doing what we can for our founders and our ecosystem.

I have also found listening to feedback from our portfolio company founders on how we could have been more helpful throughout their journey incredibly enlightening. It has quickly become clear to me that venture capital is a customer-first, people business where founders are just as important a customer as the LPs are.

I am under no illusions that I ‘know it all’ and every conversation I have with founders makes me better at my job. If I can help shed some light into the inner workings of VCs for you too, then I am more than happy to help. You can reach me at smemme@omersventures.com. Let’s keep pushing our ecosystem forward, one conversation at a time.